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Individual Investors | Rental Housing Supply 4

TL;DR

This article is part of a six part series. Read the full series:
1. Government Policy & Rental Supply | Rental Housing Supply 1
2. Ottawa’s Historical Renting Data | Rental Housing Supply 2
3. Corporations | Rental Housing Supply 3
4. Individual Investors | Rental Housing Supply 4
5. Rent Control | Rental Housing Supply 5
6. Final Recommendations | Rental Housing Supply 6

 

The Impact of Government Policy on Rental Housing Supply

A Tale of Two Demographics: Individual Investors

 

What’s the best province for landlords? Being a landlord in Ontario doesn’t seem worthwhile anymore.” 

– Lalit R. 

This has been the lament of many small rental housing providers also known as individual investors. The issues facing them were significant even before the pandemic and many were exiting the business in Ontario. Bad news travels fast and there is anecdotal evidence, at least, that prospective new investors view the risks associated with becoming a housing provider as just too risky a proposition. 

In earlier articles we showed that the demand for rental housing is ever growing but there are impediments to the creation of new purpose build rental housing. A new group of investors began to really grow starting in the 1970s on the back of housing incentives which made home acquisition easier for the average working family. This group of investors has significantly grown and is now the largest single group of rental housing provider. In this article, we will look at the issues facing these investors and how we can increase their numbers as part of improving rental housing availability. 

 

Profile 

CMHC identifies an Individual Investor as an investor that is not incorporated. Typically, these will be what are sometimes called mom and pop investors. They normally have a regular day job and have invested in rental properties as part of their retirement income planning. Most of these investors own very few “doors” and are generally naïve when it comes to the laws and regulations related to rental housing.  

While ignorance is not an excuse when getting into a new business, the other aspect that is apparent is that when a significant tenant issue arises the revenue risk is far higher than for a rental housing provider that has a large number of doors. Since most tenants are excellent, a larger provider can amortize the cost of tenant issues across the rest of the tenant base within their portfolio making it perhaps 2% or 3% problem. However, if a small provider has, say, one door (their first usually) then a problem is a 100% problem for them thus disproportionately impacting these smaller rental housing providers. 

 

Landlord Tenant Board Statistics 

The Ontario Landlord and Tenant Board (LTB) is quasi-judicial body which adjudicates matters related directly to the Residential Tenancies Act (RTA)Both tenants and rental housing providers can file a complaint with the LTB using the designated processes and forms. 

Each year, Tribunals Ontario publishes a report and includes the 12 months of statistical data ending March 31st of the current year for each of the tribunal areas including the Landlord and Tenant Board which is part of the Social Justice Tribunals Ontario cluster. 

As the 2020 report may have been impacted by the COVID-19 pandemic, the 2019 report data will be examined: 

  • Total Tenant Applications: 8,357 
  • Total Landlord Eviction Applications: 82,095 
Rent Collection Issues  56,710  69% 
  Non-Payment of Rent (L1)  46,043  62.4% 
  Combined Applications (A3)  3,878  5.3% 
  Collect Rent (L9)  1,218  1.7% 
  Failed Settlement (L3)  5,571  7.6% 
Other (typically N5)  13,945  18.9% 

 

It is perhaps not surprising that there are nearly ten times the number of landlord applications versus tenant applications. This is likely largely because landlords are more impacted by the underlying issue or because they have an obligation to protect other tenants. For example, in our experience the vast majority of N5 related applications are where a tenant is interfering with the reasonable enjoyment of another tenant(s), in which case the landlord must address this. If the problematic tenant is unwilling to resolve the situation and the landlord was unable to offer alternative mitigation, then it will be brought forth to the LTB. 

Tenants too can have a significant impact such as due to a bad faith eviction and the penalties to the landlord are significant if found to be true. But it is also likely that a significant number of these tenant applications are counter claims to a landlord-initiated action. 

The most glaring observation is that 69% of all eviction applications involve non-payment of rent. Given the delays in the tribunal process even prior to COVID-19, it becomes a very significant financial loss to a landlord. 

 

LTB Process and New Regulations Scare New Entrants 

There are two primary issues that affect rental housing providers where it involves the LTB. The first is the significant backlog of cases, which has caused exorbitant delays in the process from application to hearing. The second is the very specific procedural requirements imposed by the RTA and implemented by the LTB. 

Prior to the pandemic, the typical elapsed time from the first non-payment of rent (and never pays) to eviction was between 5 to 8 months including: the N4 (late payment of rent) process, L1 application to hearing, hearing to order issued, as well as the eviction process once an order is issued. During the pandemic, these times have increased considerably. The vast majority of tenants are good people and sometimes good people can run into financial issues. Landlords are encouraged to work with those tenants, in fact the law requires payment plans to be attempted. There are also a small percentage who will deliberately abuse the system to their advantage and are sometimes referred to as “professional tenants”.  

These so-called professional tenants often pay first and last month’s rent and then never pay again, referencing various excuses until the rental housing provider finally realizes what is really going on. At the hearing (5 – 8 months later), they will make promises to repay yet never follow through, which inevitably helps to buy more time. At the point in which they are ordered to leave, they then file an appeal with the divisional court. These are usually dismissed, but once again, that can take time. Professional tenants can easily live rent free, at the landlord’s expense, for between 12 and 24 months. 

To compound the issue, unlike other provinces, the Ontario RTA is procedurally very specific. For example, if the rental housing provider makes a small error on say an N4 (non-payment of rent), which includes anything from having the wrong date to the amount owed being off by a penny, whereby the adjudicator will dismiss the case and the housing provider will need to restart from the beginning. In other provinces, such as British Columbia, there is some accommodation in the laws to allow for a reasonable adjustment. For instance, if the date on a form is too early then there is an automatic adjustment applied to the next valid date. These procedural technicalities are bad enough but when you combine that with the long delays it means a housing provider can be without rent for well over a year while at the same time having to pay all their underlying costs such mortgages, property taxes, insurance, etc. If the provider only has, say, one door then they are subsidizing this from their own income and in most cases, this is unsustainable and incredibly stressful. 

With “interference of reasonable enjoyment” (N5) situations, landlords are generally working on behalf of the benefit of other tenants. Sometimes those tenants are putting up with significant issues from the interfering tenant, but the landlord is also subject to the same lengthy delays and procedural strictness within the LTB. The issues can be health and safety related such as smoking, allergies or extreme hoarding. Unless there is clear and present danger, the delays are still subject to the lengthy procedural timelines, which ultimately causes major problems for the interfered tenant. Sometimes that interfered tenant is motivated to leave, and the unit may become difficult to rent due to the interfering tenant. No one wins in this situation, but it is allowed to continue. 

There are other aspects of regulation such as Toronto’s landlord licensing which also put a significant cost on rental housing providers (and ultimately tenants) by adding those costs to all providers to deal with the few bad ones. Ottawa by contrast took a much more reasonable approach where the focus is on the bad actors in the community. 

 

Risk is Not Balanced 

Larger providers can amortize the cost of bad actors on the rest of the tenant base which ultimately causes rents to increase for the good tenants. However, if you only have one, two or three doors, it becomes disproportionately painful to deal with the bad actors. To illustrate, if we make the assumption that only 2% of tenants are problematic, we will see that larger entities will be less affected than smaller landlords in the event of a bad tenant. This is because for larger providers, that one tenant only makes up a 2% problem, whereas for a small provider with only one door, a sole bad tenant equals 100% problem. 

This disproportionate risk is having an impact on people who have considered becoming a rental housing provider but assessed those risks to be too high. Similarly, existing providers are looking to exit the market, thus returning rental housing back to owner-occupied single-family homes, which decreases the overall rental supply. As we saw in an earlier article, the larger purpose-built buildings have not kept pace with population growthWhile intentions were no doubt well meaning, government communications during the pandemic have nonetheless accentuated those fears with comments implying tenants did not need to pay rent, eviction moratoriums, and a significant increase in the back log of hearings. 

There is, however, another negative impact which affects the most vulnerable in our society. If the small provider wishes to reduce their risk, they will have a bias against any prospective tenant who looks to be sensitive to income interruption. This bias may not even be intentional, as fear is a powerful motivator.  

By shortening the time from application to hearing and adding more procedural flexibility within the RTA and LTB, more providers are likely to enter the market improving availability. It will also reduce the perceived risk that smaller providers consider, will thus be much more willing to take in tenants with more sensitive income situations. Given that the small rental housing provider is responsible for at least half of the rental housing in Canada this would be a very considerable lever to improve rental housing availability. 

In our upcoming section, we will highlight the surprising impacts of one area of regulation: rent controls. Most people assume rent control regulations exclusively impact rental housing providers. However, as we will see in the next section, there is a very negative impact to those it is meant to protect, namely tenants. 

 

TLDR  Key Takeaways 

  • Small scale Individual Investors are the single biggest group providing rental housing 
  • Most of the complaints at the Landlord Tenant Board (LTB) are filed by landlords 
    • 69% of all hearings relate to non-payment of rent 
    • 18.9% of all hearings relate to interference of reasonable enjoyment 
  • LTB delays, pre-pandemic, can be at least 5 to 8 months before receiving a hearing 
  • The procedural aspects of the Residential Tenancies Act (RTA) are too strict and often results in a case being dismissed requiring the entire process to be restarted 
  • While the vast majority of tenants are good people, when the small percentage of tenants cause a problem such as non-payment, then for a small landlord with one door has a 100% problem. Hence, small landlords (Individual Investors) bear a disproportionate amount of risk 
  • Recommendations: 
    • Shorten the time to receive a hearing 
    • Offer more procedural flexibility so that cases are not dismissed over small technical errors where it would not otherwise have impacted the outcome of the hearing. 

 

References: 

Residential Tenancies Act 

https://www.ontario.ca/laws/statute/06r17 

Tribunals Ontario 2019 Annual Report (Landlord Tenant Board): 

https://tribunalsontario.ca/documents/sjto/2019_11_19-Tribunals_Ontario_Annual_Report.html#contents22 

CMHC Housing Market Insights, July 2017, Rental Ownership Structure in Canada 

https://assets.cmhc-schl.gc.ca/sf/project/cmhc/pubsandreports/esub/_all_esub_pdfs/68469_2017_m07.pdf?rev=0eb4ec8b-75f9-42e3-bb97-3b24513d58b8 

 

 

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Read Part One

Read Part Two

Read Part Three

 

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